Implosion of the Credit Card Banks

[flacorps]

http://financialhopeseries.com/Test/wp/blog/?p=28

[ademas]

[vintagespeed]

reading that hurts my head.

[LBCS]

http://financialhopeseries.com/Test/wp/blog/?p=28

Taking the figures month-by-month, and assuming that no new cardholders were being added (probably a negligible figure in this economic climate), for every thousand cardholders at the beginning of January 2009 there were just 446 at the end of August.

 

Fuzzy math. What a stupid article.

[TroyP]

This article almost hints a genius, but instead falls flat on its face as another poorly written blog entry with no real substance, but plenty of conjecture based on a primitive understanding of modern finance.

[more credit less cash]

IMHO, the blog author doesn't sound too bright. He doesn't know what's he's saying. Just listing words he picked up from here and there on the web.

 

Funnies thing is that he' a collector!! Go to his homepage and click About Us tab/link.

[BigCowboy]

From the article:

 

Fitch, the company that tracks credit card chargeoffs (â€charging off†is the act of making an accounting entry indicating that a debt is not expected to be repaid), reports that starting from an already high overall figure of 7.4% in January, by August 11.52% of credit card holders were being charged off each month.

 

That statistic looks far too high for me! Any comments?

 

-BigCowboy

[LBCS]

From the article:

 

Fitch, the company that tracks credit card chargeoffs (â€charging off†is the act of making an accounting entry indicating that a debt is not expected to be repaid), reports that starting from an already high overall figure of 7.4% in January, by August 11.52% of credit card holders were being charged off each month.

 

That statistic looks far too high for me! Any comments?

 

-BigCowboy

 

Those are annual charge off rates, which the stupid author thinks is a monthly rate.

[flacorps]

Fitch's chargeoff figures applied to 1,000,00 cardholders 1/1/09

2009 1,000,000

Month %Defaults Remaining Cardholders

Jan 7.4 926000

feb 8.41 848123.4

mar 8.89 772725.2297

apr 9.66 698079.9725

may 9.5 631762.3752

june 10.79 563595.2149

july 10.55 504135.9197

august 11.52 446059.4618

[mk_378]

I thought that the charge-off rate is the percentage of all card accounts that are in charge-off status, not the number of new charge-offs each month. The writer misunderstood that fundamental principle.

 

Charged off generally means that no payment has been made for 6 months. At that point the bank is required to consider the account a loss as it is very unlikely the consumer will ever pay it. A new charge-off hitting the books represents the consumer's inability or unwillingness to pay that actually began 6 months ago. So presumably the charge-off rate will lag the worst of the recession.

Edited October 20, 2009 by mk_378

[flacorps]

Those are annual charge off rates, which the stupid author thinks is a monthly rate.

 

We're both a little off ... but it shouldn't matter too much assuming that there is anything near 1:1 relationship between balances owed and the number of cardholders, and I would expect that relationship wouldn't be that far off given the banks' methods of granting credit lines.

 

The charge-off rate is the amount of charge-offs divided by the average outstanding credit card balances owed to the issuer. Charge-off is actually an accounting term that means a company has decided it has no chance to collect a debt and charges it off its books. A rising charge-off rate is a sign of an economy under stress.

 

 

http://www.creditcards.com/glossary/term-chargeoff-rate.php

Edited October 20, 2009 by flacorps

[LBCS]

I thought that the charge-off rate is the percentage of all card accounts that are in charge-off status, not the number of new charge-offs each month. The writer misunderstood that fundamental principle.

 

Yup. Maybe we should email the author and tell him that.

[TroyP]

Those are annual charge off rates, which the stupid author thinks is a monthly rate.

 

We're both a little off ... but it shouldn't matter too much assuming that there is anything near 1:1 relationship between balances owed and the number of cardholders, and I would expect that relationship wouldn't be that far off given the banks' methods of granting credit lines.

 

The charge-off rate is the amount of charge-offs divided by the average outstanding credit card balances owed to the issuer. Charge-off is actually an accounting term that means a company has decided it has no chance to collect a debt and charges it off its books. A rising charge-off rate is a sign of an economy under stress.

 

 

http://www.creditcards.com/glossary/term-chargeoff-rate.php

 

Actually, the relationship would be off by quite a bit. You can't add month over month charge off rates, you can only average them. Which blows pretty much every number in the article out of the picture.

 

In the example in the article (which I presume you wrote) you state:

Within a single quarter, [bank of America] lost 35.5% of their cardholders.

 

That's not right at all. Based on their charge off rates, they lost about 3.4% of their cardholders in the quarter. That's a lot, but its no where near 35.5%.

 

Had B of A charged off 35.5% of their accounts in Q3, they would have realized a loss of over $50 Billion in the 3rd quarter alone.

 

So yeah... your article has some pretty substantial errors. But hey, what's $40 Bn between friends right?

[flacorps]

I thought that the charge-off rate is the percentage of all card accounts that are in charge-off status, not the number of new charge-offs each month. The writer misunderstood that fundamental principle.

 

Yup. Maybe we should email the author and tell him that.

 

Let's break it down. To understand what the number means we would really need Fitch's own methodology as they explain it to their customers and I haven't been able to find that.

 

But the "chargeoffs" number has to have an "out" door as well as an "in" door (or else it would accumulate and become ridiculously large). The "in" door is the accounts actually charged off during the month ... I think we can agree on that.

 

So the question is what is the "out" door? My position is that it is the end of the calendar month ... meaning that once an account has been charged off it does not contribute to the following month's figures.

 

Alternatively, since we are talking about securitized receivables, the bank may be required to take those securities out of the trusts that fund the accounts and that might happen on a rolling basis that would give a longer sliding window, but it still shouldn't matter too much ... some go in, some go out, and the length of time they stay in may smooth the curve of the figures but should not change the fundamental result over time.

 

If the only "out" door were the sale of the receivables to a junk debt buyer, the chargeoff rate would be climbing precipitously because the JDBs aren't in the market at all right now. The "out" door would be shut.

 

Advanta Bank is a pure-play credit card bank... I suppose if someone looked here:

https://cdr.ffiec.gov/Public/ManageFacsimiles.aspx

 

And checked Advanta's two most recent statements against their public announcments about their chargeoff rate they could back into what those percentages really mean.

[mk_378]

First it's a percent of the balances not a percent of the number of accounts. So considering the recent trend of CLD's and also reluctance of consumers to spend, the balances on current accounts are probably not increasing at the rate they used to. So even with the same amount of balances going bad, the charge off rate is going to increase because the good accounts aren't doing the same as they were.

 

It doesn't reset every month. It's just the amount presently owed on charged-off accounts versus all accounts. The "out" door seems to be only either the consumer rehabbing the account (very rare) or the creditor selling it to a CA.

 

The investors own the whole portfolio of accounts be they good or bad. If a charged-off account gets sold to a CA it is taken out of the portfolio. The investors get whatever the sale price was, similar to how they receive interest or fees paid on good accounts.

Edited October 20, 2009 by mk_378

[flacorps]

OK, Advanta had $426 million in credit card receivables outstanding at the end of 2008.

 

At the end of Q1 '09, they had $476 million outstanding and had charged off $26 million YTD.

 

At the end of Q2 '09 they had $341 million outstanding and had charged off $100 million YTD.

 

So between the two quarters, the outstanding receivables went down by $137 million, while the chargeoffs increased $74 million.

 

The chargeoff rates during those three months were running above 20% peaking at 56.95% in June due to a change to charging off anything older than 120 days rather than at 180 days.

 

It doesn't seem that either of our two assumptions about the relationship between chargeoff rates and the underlying amount of the receivables squares with Advanta's reported chargeoff rates and actual reported results.

 

...back to the drawing board for both of us.

 

P.S. -- Those bad securitized accounts usually do come back onto the books of the bank, though there is no formal requirement that they do so (the lack of a formal requirement is what allows the liability to remain off-balance-sheet). However, if the bank doesn't take the bad accounts back the trusts go into "early amortization" and no longer fund new lending ... and that is usually avoided by the banks at all costs. Advanta broke the mold in actually allowing early amortization to occur in May '09. Hence they had to shut down all their credit cards June 1.

 

P.P.S. -- I would expect media outlets describing a chargeoff rate that is reported for a month would in the interest of accuracy use the words "annual" or "annualized" in describing the rate if the number being reported in fact bore some relationship to a 12 month period even though it was being reported for a month. I have never seen that term associated with Fitch's chargeoff rate.

Edited October 20, 2009 by flacorps

[more credit less cash]

What's with Advanta's involvement?

 

Advanta is not a good example, so why are you keep bringing Advanta in your posts?

[TroyP]

OK, Advanta had $426 million in credit card receivables outstanding at the end of 2008.

 

At the end of Q1 '09, they had $476 million outstanding and had charged off $26 million YTD.

 

At the end of Q2 '09 they had $341 million outstanding and had charged off $100 million YTD.

 

So between the two quarters, the outstanding receivables went down by $137 million, while the chargeoffs increased $74 million.

 

The chargeoff rates during those three months were running above 20% peaking at 55.95% in June due to a change to charging off anything older than 120 days rather than at 180 days.

 

It doesn't seem that either of our two assumptions about the relationship between chargeoff rates and the underlying amount of the receivables squares with Advanta's reported chargeoff rates and actual reported results.

 

...back to the drawing board for both of us.

 

You're not looking at the whole picture. Not at all.

 

1) You need more complete figures. The net outstanding receivables is impacted by a) Actual accounts charged off and allowances for future charged off accounts. If Advanta looks at their portfolio of lets say $500M, and determines based on the recent credit history of their borrowers that only 80% of the borrowers are likely to repay them, they will take a charge of $100M to reduce the value of their receivables portfolio to the amount which they reasonably expect to collect. This is required by the FASB and the SEC. Now banking regulators require that they charge off accounts once they have become delinquent by 180 days. These are two separate factors, both of which decrease the amount of receivables outstanding.

 

2) There is another important reason receivables outstanding would change. People's account balances change. If I have a balance on my card at 12/31/2008 of $10,000, but I pay off $8000 in January, Advanta's credit card receivable would have decreased by $8,000. Moreover, people generally carry higher credit card balances at the end of the year than they do most of the year, because in December lots of people are splurging on Christmas gifts. So seasonal factors also come into play.

 

Post up the site where you're getting your numbers, and perhaps I can explain them in better detail. These aren't linear relationships, a number of different scenarios come into play. In any case, yes Advanta had huge credit card losses, but your article is predicated on assumptions which frankly, are incorrect.

[flacorps]

What's with Advanta's involvement?

 

Advanta is not a good example, so why are you keep bringing Advanta in your posts?

 

Advanta is a horrible example of how disastrous things can get and of course its misadventure is greater in severity than what is happening to the others ... but it is a good example for figuring out this chargeoff thing because all they did was make credit card loans.

 

As I posted above, the financial statements are here:

https://cdr.ffiec.gov/Public/ManageFacsimiles.aspx

Edited October 20, 2009 by flacorps

[flacorps]

You need more complete figures. The net outstanding receivables is impacted by a) Actual accounts charged off and allowances for future charged off accounts.

 

I was looking at the actual outstanding receivables, not the net outstanding receivables as impacted by adjustment of loan loss allowances (the latter appeared in the balance sheet, not the chargeoff section).

 

I didn't view the net oustanding receivables for balance sheet purposes as germane to the analysis.

Edited October 20, 2009 by flacorps

[TroyP]

What's with Advanta's involvement?

 

Advanta is not a good example, so why are you keep bringing Advanta in your posts?

 

Advanta is a horrible example of how disastrous things can get and of course its misadventure is greater in severity than what is happening to the others ... but it is a good example for figuring out this chargeoff thing because all they did was make credit card loans.

 

As I posted above, the financial statements are here:

https://cdr.ffiec.gov/Public/ManageFacsimiles.aspx

 

Are you using Advanta in DE or Advanta Bank Corp in UT (the link doesn't go to the actual doc, it takes you to the search page, and there's at least 2 possibilities).

[flacorps]

Utah ... it's the one that makes the credit card loans.

[kevinkev99]

http://financialhopeseries.com/Test/wp/blog/?p=28

Taking the figures month-by-month, and assuming that no new cardholders were being added (probably a negligible figure in this economic climate), for every thousand cardholders at the beginning of January 2009 there were just 446 at the end of August.

 

Fuzzy math. What a stupid article.

 

 

+1

 

Blogges rule. Not. Editors exist for a reason.

[hurricanesfans27]

got one word for the author

 

 

 

 

 

 

 

 

 

 

BOOB!!!!!!

[flacorps]

+1

 

Blogges rule. Not. Editors exist for a reason.

 

Yes. They're there to help people spell "bloggers".

 

The last time I was in a dispute like this I was ultimately proven correct.

 

http://creditboards.com/forums/index.php?s...t&p=3305393

 

That doesn't mean I'm right this time, but so far I seem to be holding my own. At least we have established that sustained 20%+ default rates for several months will break the credit card business model of a bank (and will break the bank if that's all they've got).

 

So the question is "how long can a bank sustain a 14%+ credit card default rate?" ... 'cause that's what's happening over at Bank of America.